ESG factors becoming a focus for real estate investors

While ESG factors play an important role in real estate managers' investment decisions, asset owners also are asking managers to look inward at their own firms' diversity and inclusion efforts.

Gender and ethnic diversity is becoming a big issue for real estate managers, driven by some of the largest asset owners that do not think management firms are diverse enough and are calling on them for change, said Josh Herrenkohl, New York-based senior managing director in the real estate practice at FTI Consulting.

For the first time this year, Pensions & Investments included diversity and inclusion questions in this year's real estate manager survey. Only three of the 84 managers that responded to this year's survey are minority-or-women owned firms. They are Adelante Capital Management LLC, Phocas Financial Corp. and TerraCotta Group LLC.

"As a trend, women and minorities are gradually becoming better represented within all ranks of real estate firms, but progress is much slower at the very senior level," said Tingting Zhang, the El Segundo, Calif.-based founder and CEO of the TerraCotta Group. "The reasons are plural and complicated."

The long hours and "cut-throat competition" are not attractive career paths for women who desire work-life balance, Ms. Zhang said.

"In addition, there are subtle but substantive barriers for women and minorities to lead firms in a field that is still dominated by white males," she said.

However, the barriers can be overcome with exceptional investment performance, Ms. Zhang said. And a firm with diverse ownership often attracts a diverse investment team, in background as well as in problem-solving skills and risk management, leading to differentiation and stronger investment performance, she said.

According to P&I’s real estate manager survey, 38.5% of real estate managers’ employees are minorities or female; 19.7% of senior management are women and 14.2% are minorities.

Women account for 20.7% of investment roles, while executives who are members of a minority group make up 17.4% of investment positions.

Forty-eight managers provided gender and ethnic breakouts for the survey.

Some managers, including J.P. Morgan, are sponsoring real estate industry diversity initiatives. The asset manager is committed to fostering diversity, equity and inclusion in the real estate industry and at J.P. Morgan, said Mike Kelly, managing director and head of real estate Americas at J.P. Morgan Asset Management.

“Most recently, J.P. Morgan real estate has committed to serve as mentors, educators and financial supporters to Project Destined, a program of project-based real estate training grounded in ownership, access and financial health for urban youth,” Mr Kelly said.
Project Destined provides eight-week, paid virtual internships for diverse high school and undergraduate students, according to the organization’s website.

The firm is also a founding donor and major sponsor of the SEO/PREA Real Estate Track program, which is the Pension Real Estate Association and the Sponsors for Educational Opportunity’s real estate training program for qualified Black, Hispanic, and Native American undergraduates. J.P. Morgan’s real estate unit has also hosted SEO internships since 2018.

Overall, environmental, social and governance factors are top of mind for managers and asset owners.

“From our point of view, being a long-term investor in assets like real estate requires explicit consideration of ESG aspects as a fundamental part of making an investment decision,” said Jon Pliner, New York-based senior director and head of delegated portfolio management in the U.S. at Willis Towers Watson PLC. “For many of the investment managers we talk to, the importance of how an asset fits in with local communities and its environment has always been important.”

Likewise, the carbon efficiency of buildings has been increasingly important to tenants for several years, and countries, including the U.K., have regulations around the energy efficiency of buildings, he said.

What is more recent is that investors and consultants are pressing managers to include ESG in their investment process, Mr. Pliner said.

“The whole topic of ESG has become more formalized, with more policies, monitoring and targets expected,” Mr. Pliner said.

While several real estate managers are considering ESG aspects implicitly, they have not put in place policies or measurement tools to demonstrate this, Mr. Pliner said.

“Investors and consultants have been keen to encourage managers on these aspects where progress has been lacking,” he said.

“We expect more managers will improve their policies and measurement of ESG over time,” he said.

However, Anthony Cazazian, New York-based managing director and head of U.S. residential real estate at Man Global Private Markets, said that ESG factors are integral to its investments. For example, the firm’s U.K housing strategy has a community and affordable housing focus and the firm strives to obtain Energy Star certifications for homes it builds.

Man GPM was an early investor in the single family home for rent sector, Mr. Cazazian said.

“There’s a lot of opportunity to focus on ESG, whether it’s affordable housing, energy efficient home building or new technology that bring advancements in energy efficiency,” Mr. Cazazian said.

“Many real estate managers concentrate on saving energy with LED lighting and low flush toilets but Man GPM executives are continually trying to be at the forefront,” he said.

“While sustainability or ESG and resiliency is gaining increased awareness in the industry and amongst investors, ESG&R (ESG and resiliency) have always been part of how we manage our business and our portfolios,” J.P. Morgan’s Mr. Kelly said.

J.P. Morgan Asset Management has integrated ESG and resiliency into its investment process, he said.

“It is much more than the numbers, all aspects (of ESG and resiliency) are fully integrated into the way we invest and manage our assets,” Mr. Kelly said. “Owning and managing quality assets with high operational efficiencies creates not just a resilient portfolio but one positioned for long-term performance.”